Government opens itself to be cheated from collecting legitimate revenue by unscrupulous traders because of the introduction of the deemed VAT input clause in the proposed VAT hike Bill.

Cheating the government is cheating the ordinary people of the country. Nonetheless, deemed VAT from other sectors has been removed.

Under the proposed VAT hike Bill, where the VAT rate is planned to be increased from the current 11% to 15% and which will also encompass the wholesale and retail trades and the health sector, which, currently is exempted from VAT, the Bill is expected to be submitted to Parliament next month.

Suresh I. Perera, Principal Tax and Regulatory, KPMG Sri Lanka (an audit firm), speaking at a tax seminar organized by CGMA at its Colombo office yesterday said in most jurisdictions VAT is not charged on the wholesale and retail trades and also on the health sector.

The proposed amendments however, make such categories liable to VAT, with certain exemptions in the health sector.

Perera said under the VAT jurisdiction deemed VAT is bad in law. Deemed VAT input tax has come about after traders protested against the proposed VAT hike. Deemed VAT input tax under the proposed new regime, however, makes it possible to claim VAT input tax from non VAT registered suppliers, who, ipso facto are not liable to pay VAT.

Under the proposed amendment, traders who make a quarterly turnover of Rs 12.5 million will be liable to pay VAT. And, under normal VAT laws, even if a VAT registered retailer buys a good from an unregistered supplier for say Rs 90, adds a profit of Rs 10 to that purchase, thereby making his sales price sans VAT Rs 100 and if the new VAT hike has come into force, then his selling price including the new VAT would be Rs 115. Of this price, Rs 15 will go to the Inland Revenue Department (IRD) and the balance to the retailer’s pocket.

But under the deemed VAT input tax law, where the retailer would only have to remit the difference between the VAT output tax and the VAT input tax, if in the event the item is purchased from an unregistered VAT supplier for Rs 90, it is still presumed that the price of Rs 90 for which it was procured from the supplier would have a VAT input component of Rs 11.74 (15% of Rs 90).

After adding the profit of Rs 10, thereby taking the retail price up to Rs 100, followed by the inclusion of the VAT output tax of 15% on the Rs 100 value, the item then would be sold to the consumer for Rs 115. Whereas under the normal VAT law, Rs 15 from this transaction would be remitted to IRD, however, under the deemed VAT law, if the original supplier is an unregistered VAT supplier, then only a mere Rs 3.26 will be remitted.

This would deprive the government of legitimate VAT revenue of Rs 11.74, or 78.27% of legitimate VAT revenue. The Rs 3.26 figure is the difference between the VAT output tax (Rs 15) and the VAT input tax (Rs 11.74).

Similarly, in respect of the health sector which currently is non VATable, nonetheless, under the proposed amendments, doctor’s charges will be liable for VAT. Under the proposed amendments, OPD, dialysis and diagnostic services as well as medical drugs will however, be VAT exempt.

Perera further said under the proposed VAT amendments, retrospective laws are also included in the agenda. Retrospective legislation is bad in law, he said. The proposed VAT hike will be retrospective from 2 May 2016, on which date it originally came in to effect, but which was invalidated by the Supreme Court (SC) on the grounds that it hadn’t been passed in Parliament.

Perera also said that retrospective legislation would also apply in respect of the VAT threshold for other business activities other than the wholesale and retail sectors. For instance, the threshold of VAT on other supplies such as services and manufacturing is planned to be changed from Rs 3.75 million to Rs three million per quarter with retrospective effect from 1 April 2016.

That means that once the new VAT law comes in to effect such suppliers in the interim will be out of pocket. One good piece of legislation is that the deemed VAT, other than on the VAT input tax on trade has been removed in the proposed new law.

Previously, there was a maximum limit of 25% on supplies under the deemed VAT tax regime. Deemed VAT is against VAT principles, said Perera. It’s the duty of the IRD to make each and every assessment and not presume anything to be deemed, he said.(Ceylon Today)

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